Procter & Gamble Seems To Be On Track To Achieve Its Cost Savings Target
According to a report published by Bloomberg on December 13, Procter & Gamble ( PG ) is planning to restructure its overseas business units. Under the restructuring program, the world's largest consumer products manufacturer will merge its Eastern and Central European unit with the Western European unit, while its Indian business will be merged with the Middle East and Africa unit.
P&G presently has five geographic units-North America, Latin America, Western Europe, Asia and CEEMEA (includes Central and Eastern Europe, Middle East and Africa). The company will have an unchanged number of geographic units post the restructuring program. Although P&G has not yet made any official announcement regarding the undertaking of the program, the company should unveil the plan in 2014 according to the report. The program will help P&G to accelerate sales growth and cut costs if it is undertaken, thereby providing room for investment in other initiatives.
Our price estimate for Procter & Gamble's stock stands at $73 , about 10% lower than its market price.
Increasing Productivity Is Top Priority For P&G
P&G intends to make productivity its core strength. In recent years, the company has taken significant steps to enhance productivity, including a five-year cost savings initiative that will last until 2016. Through the initiative, P&G aims to save $10 billion in costs associated with cost of goods sold, marketing expenses and non- manufacturing overhead. The primary agenda behind the cost savings program is to have financial flexibility in order to maintain investment levels and drive long-term growth, even in weaker micro-environments.
One significant area where the company is striving to reduce costs is energy consumption. In 2010, P&G revealed a sustainability program to drive 20% reduction in energy usage per unit of production by 2020. According to P&G's most recent sustainability report, the company has reduced energy consumption by 8%, and continues to introduce energy management systems at new locations to save more energy. Although it is difficult to assess the precise impact of the energy savings, P&G is positive about saving millions of dollars by implementing the energy solutions.
So far P&G has managed to save about $1 billion under its five-year savings program. The restructuring of overseas business units will bring the company one step closer towards achieving its savings target of $10 billion. It will be able to reduce costs related to back office and logistics and distribution. It will also see acceleration in sales via streamlined management decision making and manufacturing process.
Cost Savings Could Be Used To Fund Expansion Initiatives
P&G is currently underweight on the emerging markets compared to its competitors Unilever ( UL ) and Colgate-Palmolive ( CL ) . About 40% of P&G's sales come from fast growing emerging markets, while Unilever and Colgate generate over 50% of sales from these markets. Therefore, it is to no surprise that in recent quarters P&G has increased its focus towards expansion in the emerging markets. In our view, the cost savings could help the company to fund its expansion plans by allowing it to invest back in innovation and increase the advertising support for its products.
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